Statement of Rajeev Chandrasekhar, MP at the Prime Minister’s meeting on ‘Global Economic Scenario’

New Delhi, 3rd November 2008

There’s absolutely no doubt or ambiguity in my mind that our economy and business is poised at a very critical point today. There is a crisis of confidence in investors, in business – and the crisis of confidence is about the growth scenarios in the forward looking years of 09-10, 10-11. This crisis of confidence has crept down rapidly to the credit markets and banks following the cues of our Central Bank governors comments on National Television, where he quite candidly said he is not sure what the coming year will be like!

If this crisis of confidence is allowed to continue, it will most certainly become a self fulfilling prophecy and we can then look forward to dramatic slowdown as in the mid-90s.

FICCI has pointed out repeatedly over the last few quarters that all wasn’t well with the economy – in the face of the oxygen being sucked out by the RBI through its monetary policy measures. I say this not necessarily to criticize today but to make a point on how much we need to rollback our previous monetary tightening.

Let me give you an example of what’s happening today. Just four days ago in a meeting called in Bangalore to understand the implications on Economic slowdown, a PSU bank chief said “Despite the rate cuts our cost of capital remains high and therefore costs of borrowing will be high. We are telling corporates not to come to us

to borrow and to either defer their capital spending/expansion programs or to use their internal accruals or equity for growth”. Given that almost 70%+ of FICCI members big, medium and small are in investment and expansion mode currently you can imagine the implication of this view from within the credit market.!

Further, we are aware at least in two private bank cases, where despite the rate cuts, the banks have increased their lending rates! There is very little short term money and its expensive as we know from weekend call money rates and there’s almost no medium and long term money available. It is clear therefore that the measures by the RBI in rate cuts and liquidity infusion have clearly had almost ZERO effect in reaching the businesses and consumers, thus far, except for PSUs and some large corporates. Recent policy action of liquidity infusion and rate cuts are proving to be totally ineffective in the face of widespread and general risk aversion in the Banking sector.


My suggestions:
While FICCI has suggested a series of policy actions and prescriptive measures to stimulate the economy and growth again and I will hand it over to you and we did this once before a few months ago unfortunately it was ignored for the most part and will go down as a lost opportunity at the top of the market –– I will share the crux of these new suggestions:

Before I start I accept the basic premise that businesses that have built business models that cannot weather a moderation in growth rates will and should pay a price, but they should be the exception. Insolvency shouldn’t be visiting all businesses and Industry as a whole and hence the issue of general risk aversion in our banks HAS to be solved.

Firstly, the only way to address this malaise of risk aversion is to get confidence going around our growth story. The most important policy action on the part of the government is to get all the focus – monetary and fiscal policies wise - on growth. There is enough potential consumer and infrastructure demand in our economy to fuel growth, if the focus is on growth. We must stop this monetary policy contradiction of trying to manage inflation in an economy going downhill and at the same time trying to stimulate growth. We have repeatedly said our inflation is a supply constrained inflation and by suppressing demand we are damaging the real economy. We are the only major economy and central bank still playing around with this concept of managing inflation through monetary policy – when every other central bank is focused on aligning its monetary policy to prevent deflation, recession and stimulating growth. This is the only way to address this risk aversion in credit markets today. Sir, given the trends of global markets, inflation will decline naturally. Eg over the last week alone the prices of most block building raw materials that are input to a host of industries have crashed! Eg,Sulphur from $350 to $85, Glycerin from $1600 to $600, all significant inputs into pharma, FMCG, Fertlizer industries. If for some reason the government is not willing to go the full hog on growth, then the only other solution to this problem of risk aversion is to have direct lending windows from government to sectors affected by this unrealistic risk aversion!

Secondly, immediate, deeper cuts in rate and CRR and we are suggesting CRR from 5.5 to 4.5 which is same level as 2004/2005 and repo rates to 5% in the near term. These levels enable more liquidity to be made available to the credit and equity markets to step up and address the gaps from the stalled International flows.

Thirdly, Exporters especially the small and medium ones have been impaired for many quarters now and are now being hit by lack of pre-shipment credit and need to do business with open credit etc and freezing of credit lines. Government must in mission mode address the exporters issues and get them fully enabled, given the competitive advantages of a weaker rupee. For Eg, the 90 days window for refunding Excise Duty for exporters must be reduced to 7 to 15 days since this is an important source of working capital for them.

Fourthly, review and relax sectoral caps in Insurance, Telecom, Aviation, Retail, and thus, increase FDI flows.

Fifthly, Railway rates must be effectively reduced, by changing classification – as you know rates have gone up over the last few years for a number of commodities, not directly but as a result of tariff reclassification.

Sixth, NRE deposit rates be increased and a strong FDI strategy be pursued even if there is very little time left for this government.

Seventh, in addition, step up public spending on infrastructure.

Like these seven, there are a series of measures that we hope Government takes note of. We have spent significant effort in putting this together and I hope the Government examines these. As I mentioned earlier, our economy has significant potential consumption and infrastructure demand capacities domestically on the back of which we can achieve growth.

I believe this critical moment can be weathered over by our economy by firm, clear decisive steps on part of the Government and there is no reason for us to be derailed from our broad growth trajectory.